Franchising is an established growth strategy that can lead to explosive growth with proper vision and execution. The successful development and implementation of this strategy requires a system that can be easily replicated and a commitment to operational excellence and regulatory compliance. While business leads focus on fine-tuning and teaching the system, business minded attorneys identify and help manage risk as they guide franchisors through the compliance hurdles.
The most significant legal requirement for franchising a business is the development of a Franchise Disclosure Document (“FDD”). The FDD is required in every state because of federal regulation known as The Franchise Rule. Certain states impose additional rules and regulations. These states are commonly referred to as registration or filing states.
Virginia is a franchise registration state
Most franchisors will need to register their FDD in Virginia before engaging in any sales activity in the state. Registering the FDD is a process where the franchisor submits the FDD along with an application and other items identifying the franchisor for review. Franchise registration is typically prepared by legal counsel with specialized knowledge in franchise law.
The State Corporation Commission reviews and approves franchise registration prior to allowing any franchisor to engage in sales activity in Virginia. During this review process, an examiner will be assigned and will communicate any noted deficiencies or concerns. The rules and regulations governing franchises in Virginia are found in the Retail Franchising Act and the Retail Franchising Act Rules. Successful registration results in the registration being declared effective in Virginia.
It is unlawful to offer or sell a franchise in Virginia before the FDD has been registered and declared effective by the State Corporation Commission. While there are some exceptions to registration, they are very limited and do not apply to most franchisors. The consequences of engaging in franchise activity without an FDD or effective registration can be severe. So what goes into the FDD?
The offer or sale of a franchise opportunity can only be made through an FDD prepared in compliance with The Franchise Rule. The FDD is designed to provide information about the franchisor, the franchise system and the agreements that will bind the franchisor/franchisee relationship. There are 23 required sections of information. Each section is referred to as an Item in the FDD. The 23 Items include:
- The Franchisor and any Parents, Predecessors, and Affiliates;
- Business Experience;
- Initial Fees;
- Other Fees;
- Estimated Initial Investment;
- Restrictions on Sources of Products and Services;
- Franchisee’s Obligations;
- Franchisor’s Assistance, Advertising, Computer Systems, and Training;
- Patents, Copyrights, and Proprietary Information;
- Obligation to Participate in the Actual Operation of the Franchise Business;
- Restrictions on What the Franchisee May Sell;
- Renewal, Termination, Transfer, and Dispute Resolution;
- Public Figures;
- Financial Performance Representations;
- Outlets and Franchisee Information;
- Financial Statements;
Franchising in Virginia requires compliance with The Franchise Rule and Virginia law.
Virginia Franchise Registration Process
A franchise offering is registered in Virginia by submitting an application packet to the Division of Securities and Retail Franchising at the State Corporation Commission.The application process requires submission of a copy of the FDD and other documents. These documents are reviewed for compliance by an assigned regulator. A franchisor cannot offer or sell franchises in Virginia until the regulator has declared the FDD effective in Virginia.
The initial franchise application packet includes:
- A complete copy of the FDD;
- Uniform Registration Application Page (Form A);
- Franchisors’ Total Costs and Sources of Funds (Form B);
- Uniform Consent to Service of Process (Form C);
- Guarantee of Performance (if applicable);
- Auditors Consent;
- Corporate Acknowledgment (if applicable);
- Filing fee.
These documents are provided to the State Corporation Commission electronically in PDF format. Franchisors can file online or by mail.
Virginia Specific FDD Terms
Virginia has enacted certain laws designed to protect consumers in Virginia from certain unfair conditions. A franchisor may need to make certain changes to the FDD and franchise agreement to comply with Virginia law. For instance,
- In Virginia, it is unlawful for a franchisor to:
- Terminate a franchise without reasonable cause; or
- Use undue influence to induce a franchisee to surrender any right.
- In Virginia, a franchisor may be required to defer collection of any fee or provide other financial assurances.
Franchisors can address any conflicting terms in the FDD by using a Virginia state addendum. State addendums to a franchise agreement are executed at the same time as the franchise agreement. Addendums supersede and control the relevant portion of the FDD or franchise agreement.
Franchise applications are submitted by:
- Physical mailing
Division of Securities and Retail Franchising
P.O. Box. 1197
Richmond, Virginia 23218
- Online through the NASAA system.
Exemptions From Registering a Franchise in Virginia
A franchisor can file for an exemption from registration requirements under limited circumstances. The State Corporation Commission establishes the scope of exemptions and the procedure for obtaining an exemption in 21VAC5-110-75. Types of exemptions include:
- Sale or transfer by existing franchisee;
- Renewal or extension of existing franchise;
- Offers and sales to existing franchisees;
- Seasoned franchisor;
- Institutional franchisee; and
- Substantial investment.
Amendments to Franchise Disclosure Document
All franchisors are required to update the FDD within a certain time period after a material change pursuant to federal law. Virginia imposes an additional requirement. Franchisors must submit pre-effective or post-effective amendments to the Virginia franchise registration within 30 days of a “material change”. In Virginia, material change is defined under The Retail Franchising Act Rules to include “a fact, circumstance, or condition which would have a substantial likelihood of influencing a reasonable prospective franchisee in the making of a decision relating to the purchase of a franchise.”
Specific examples that may require an amendment include:
- Changes to management;
- Changes to fees or terms;
- Changes to the franchise agreement;
- Changes to the franchise system;
- Changes in litigation.
The determination of whether a change is material is fact-specific. The consequences for failing to update registration after a material change could be severe.
Life's so unpredictable. You never know what might strike you or your close ones tomorrow. So what to do whenever you or your relative...
Renewal of Franchise Registration
All franchisors are required to update the FDD within 120 days of the end of the fiscal year. The renewed FDD contains updated financials and any changes in the franchise system. Virginia imposes an additional requirement.
A franchisor must renew their franchise registration each year in order to continue offering franchises in Virginia. The renewal is accomplished by providing a renewal application packet to the State Corporation Commission. The renewal is substantially similar to the initial application packet. One new document includes a redline comparison between the prior year FDD and the current FDD.
- Initial Application ($500.00);
- Amendment Application ($100.00);
- Renewal Application ($250.00).
Fees are paid to the Treasurer of Virginia or submitted by e-check through the NASAA system.